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What Are Shares?

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  • Written By: C. Mitchell
  • Edited By: John Allen
  • Last Modified Date: 19 March 2014
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A “share” is a financial term for a piece of corporate ownership that can be bought and sold by a prescribed class of investors. Companies elect to issue shares for a variety of reasons, and it is usually a company’s board of directors that determines how many to sell and how to sell them. Each share represents a piece of the company, and owners typically have a voice in corporate politics and governance commensurate with their degree of ownership. In many instances, buying shares is a popular means of investing money.

Companies elect to sell shares for a variety of reasons. First and foremost, the sale is a means of generating income. Each share represents a certain percentage, usually very small, of the corporation. Investors purchase each share at a fixed price. In exchange for their investment, the investors will typically receive a yearly dividend, or portion of the company’s overall profit.

Many small businesses see share sales as a way to generate capital for new ventures, or even as a way to get a business off the ground. These companies will sell ownership interests in exchange for typically large sums of money. Most of the time, these sales are private — that is, they are open to a select number of invited investors only. Executives and some employees are also typically given an opportunity to purchase. This benefit is commonly referred to as a stock option.

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There are several types of shares, the buying and selling of which is set by the issuing corporation. Another route companies can take is to make their shares available for public trade. Public trades happen on the open market, and are typically listed on at least one of many international stock markets. Any investor can purchase stocks on the open stock market.

With ownership comes certain benefits and responsibilities. Investors who own a certain share percentage typically have a say in how a company is managed, and are usually entitled to vote on any major corporate decisions. The percentage of ownership required to realize voting and decision-making benefits varies from company to company. The identity of possible owners is one reason that some companies choose not to make their company available for public trade.

Corporate ownership is only one of the benefits of share ownership. Financial gains and investment potential are another driving force, particularly on the open market. The strategic purchase and sale of corporate shares is a popular investment strategy for many people.

As corporate profits increase, so to do share prices in most situations. Investors who sense that a company is on the cusp of growing may make significant share investments at a low price with the aim of selling to a new buyer once dividends, and prices, go up. Other times, investors may make share purchases of growing companies as a means of generating income over a sustained period of time.

Stocks that are publicly traded are often sold through brokerage firms as well as — or sometimes instead of — through the issuing corporation. Shares of stock are commonly traded and bought in rapid succession depending on market rises or falls. These purchases or sales are made on the stock market floor, in brokerage houses or online.

Because the market is in constant flux, there is no sure way to definitively identify the best or worst shares. The best shares one day may be worth significantly less the next. Although investing by share in a company can be a lucrative scheme, stocks are usually considered as among the most volatile investments. If a company folds or when profits are not realized, share value typically devalues rapidly. Share purchases should be undertaken only with careful research and planning.

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EliseP
Post 1

Should a person purchase shares without researching them first? Should a financial adviser help with the decision of purchasing shares?

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